Factual and Procedural Background
The Commissioners of Customs & Excise ("The Commissioners") appealed against a decision of the Manchester VAT & Duties Tribunal ("the Tribunal") dated 28 January 2004. The Tribunal had found that the use by St Paul's Community Development Trust ("St Paul's") of parts of premises in Birmingham for running a day nursery was "otherwise than in the course or furtherance of a business" within the meaning of note (6) to item 2 of Group 5 of schedule 8 of the Value Added Tax Act 1994 ("the 1994 Act"). Consequently, the construction works on those premises were zero-rated for VAT purposes. This reversed the Commissioners' earlier decision that the nursery was a business activity and thus subject to standard rate VAT on the construction works.
St Paul's is a registered charity operating in a disadvantaged area, providing various activities including the day nursery, which accounted for about 10% of its total income. The nursery was funded largely through grants and fees charged to parents, with fees set to break even rather than generate profit. The Tribunal considered documentary and oral evidence, including from the Chief Executive of St Paul's, and found that the nursery was run as a charitable activity rather than a business.
The Commissioners challenged the Tribunal's decision on legal grounds, asserting that the nursery activities constituted a business for VAT purposes and that the Tribunal had erred in law and made unreasonable factual conclusions.
Legal Issues Presented
- Whether the nursery operated by St Paul's constituted use "otherwise than in the course or furtherance of a business" within note (6) to item 2 of Group 5 of schedule 8 of the 1994 Act, thus entitling the construction works to zero-rating for VAT purposes.
- Whether the Tribunal erred in law in its construction of note (6) and in concluding that the nursery was not a business for VAT purposes.
- Whether the Tribunal's conclusion that the nursery was not a business was unreasonable or perverse on the facts presented.
- Whether the Tribunal was bound by the precedent set in Customs and Excise Commissioners v Yarburgh Children's Trust [2002] STC 207, and if so, whether the facts of the instant case were distinguishable.
Arguments of the Parties
Appellant's Arguments (The Commissioners)
- The Tribunal wrongly treated business and charitable activities as mutually exclusive rather than asking if the charitable activity was carried out in the course of a business.
- The Tribunal placed undue weight on the fact that fees were set to break even rather than to make a profit.
- The Tribunal should have found the nursery to be a business, similar to private commercial nurseries, and therefore not entitled to zero-rating.
- The Tribunal erred in concluding it was bound by the Yarburgh case without properly distinguishing the present facts.
- The Tribunal failed to focus on the intrinsic nature of the nursery's activities, which were commercial in nature.
Appellee's Arguments (St Paul's Community Development Trust)
- The nursery was operated as a charitable activity, not a business, despite fees being charged.
- The fees charged were designed only to cover costs after grants and donations, with no intention or capacity to make a profit.
- The Tribunal correctly applied the law and precedent, including the Yarburgh case, which was factually similar.
- The intrinsic nature of the nursery's activities was social and charitable, aligned with government programmes supporting disadvantaged families.
- The presence of fees alone does not convert the activity into a business for VAT purposes.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Edwards v Bairstow [1956] AC p 14 |
Standard for setting aside tribunal decisions as unreasonable or perverse. |
Used to assess whether the Tribunal’s factual conclusion that the nursery was not a business was reasonable. |
| Customs and Excise Commissioners v Yarburgh Children's Trust [2002] STC 207 |
Definition and application of "relevant charitable purpose" and "business" in VAT zero-rating context. |
The Tribunal relied on Yarburgh as binding precedent, finding no meaningful distinction with the instant case and following its reasoning to allow zero-rating. |
| Commission of the European Communities v The Netherlands [1987] ECR 1471 |
Definition of economic activity under the Sixth VAT Directive; activities pursued independently for revenue generation are taxable. |
Distinguished from the instant case to illustrate when fees indicate a business for VAT purposes. |
| Institute of Chartered Accountants in England and Wales v Customs and Excise Commissioners [1999] STC 398 |
Regulatory functions charging fees may not constitute a business or economic activity for VAT. |
Supported the view that charging fees alone does not necessarily mean carrying on a business. |
| Customs and Excise Commissioners v Morrison's Academy Boarding Houses Association 1978 STC 1 |
Test for defining "business" in VAT context focusing on activities predominantly concerned with making taxable supplies. |
Adopted as the appropriate test for determining whether St Paul's nursery was a business. |
| Customs and Excise Commissioners v Lord Fisher [1981] STC 238 |
Clarification that absence of profit motive does not exclude an activity from being a business. |
Applied to assess whether the nursery’s activities were a business despite no profit motive. |
| Wellcome Trust v Commissioners of Customs & Excise [1996] ECR 3013 |
Economic activity includes activities pursued on an ongoing and commercial basis. |
Considered in relation to the "predominant concern" test and intrinsic nature of activity. |
| European Commission v France [1988] ECR 4797 |
Interpretation of economic activity and concessions in VAT law. |
Supported the Tribunal’s finding that fees charged by St Paul's were concessions and did not constitute a business. |
| Floridienne SA & anr v The Belgian State [2000] STC 1044 |
Economic activity requires ongoing and commercial purpose. |
Supported the view that intrinsic nature and purpose of activity matter for VAT classification. |
Court's Reasoning and Analysis
The court identified a two-stage process in the Tribunal’s decision: first, a legal construction of the term "business" in note (6) to Group 5 of schedule 8 of the 1994 Act, aligned with the concept of "economic activity" in Article 4 of the Sixth VAT Directive; second, application of that construction to the facts to determine whether the nursery constituted a business.
The court rejected the Commissioners' argument that the Tribunal treated charitable and business activities as mutually exclusive, clarifying that the Tribunal used "charitable" in its ordinary sense to contrast with profit-oriented business activities. The Tribunal correctly recognized that charging fees does not automatically render an activity a business for VAT purposes.
The court upheld the Tribunal’s reliance on the Yarburgh case, finding no meaningful factual distinction to justify a different outcome. It accepted that comparing facts with precedent is legitimate and appropriate.
The court applied established tests from previous cases (notably Morrison's Academy and Lord Fisher) considering factors such as seriousness, continuity, scale, business principles, and whether the activity was predominantly concerned with making taxable supplies for consideration.
It found that St Paul's nursery satisfied all but one of these indicia, with the key distinction being that the activity was not predominantly concerned with making taxable supplies for consideration, as fees were set only to break even and represented concessions subsidized by grants and donations.
The court emphasized that the intrinsic nature and purpose of the activity, rather than the mere presence of fees, determine whether it constitutes a business for VAT purposes. It also noted the principle of tax neutrality but explained it applies only if the undertaking is a taxable person.
In light of the evidence and legal principles, the court concluded that the Tribunal’s decision was reasonable and correct.
Holding and Implications
The court DISMISSED the appeal by the Commissioners of Customs & Excise.
The direct effect is that the construction works carried out on the parts of the building used for the nursery by St Paul's Community Development Trust remain zero-rated for VAT purposes. The court affirmed the Tribunal's finding that the nursery activities were not carried on in the course or furtherance of a business under the relevant VAT legislation and European Directive.
No new precedent was established; the decision reaffirmed existing legal principles and their application to the facts of this case.